We all knew the inflation situation was bad, but this morning’s 1 per cent month on month surge to a 41 year high of 11.1 per cent still has a shocking feel to it. How does the UK government cope with the ugly threat of soaring inflation just as we head into what could be the worst recession in living memory – well we find out tomorrow when chancellor Jeremy Hunt unveils a budget which has already been widely trailed in the press this week – straight from Rishi Sunak’s own treasury playbook.
The FTSE 100 was unmoved by the inflation announcement – trading roughly flat at 7,378 at 9am although the more domestically focused FTSE250 had given up 0.9 per cent. In Europe the DAX and the CAC40 were down by a similar margin, possibly spooked by an ECB warning of risks to financial stability in the eurozone economy, while overnight the S&P500 closed up 0.9 per cent and the Nasdaq was 1.5 per cent to the good as the post-mid terms positivity continued.
While the inflation figure is shocking it is not a total surprise given food price inflation continues to run hot, at around 16 per cent, and last month saw the impact of the latest energy price cap increase. There is little the Bank of England is likely to do that will surprise us given it has already indicated further rate rises are coming – they key now is whether this is the peak for inflation and how quickly it dissipates during 2023 – any update from the chancellor on energy price support after April may help give some steer here. What is certain is that the so-called ‘pivot’ in central bank policy in the UK is still some way off and the Bank’s insistence recently that market expectations for peak rates may be overdone could come under scrutiny.
Overnight concerns over missiles which spilled over from the Ukraine-Russian war onto Polish territory dissipated somewhat. European stocks down a touch, FTSE and dollar up a bit after the missile strikes Poland, but no major hit to risk appetite. The S&P 500 closed higher, shrugged off the Poland missile news pretty easily. Bulls in charge with PPI very light at +8.0 per cent vs +8.3 per cent expected, gives the pivot chargers an excuse to bid up risk. We are probably about at the end of the current extension, around the 61.8 per cent retracement of the Jun-Aug rally. Could see a push up to 4,100 but 4,000 looks like a good round number…everyone playing the long after the midterms and into the Fed meeting has had a good go and the inflation number made this move happen a lot faster than it otherwise might have.
Poland – Ukraine playing it up of course. But the US playing it down is good for risk so far – Biden says it probably didn’t come from Russia. In fact the US told Nato partners that the blast came from a Ukrainian air defence missile. Some airlines getting offered on this with Wizz Air (WIZZ) and EasyJet (EZJ) falling about 5 per cent presumably on fears that it might tamp down demand for flights to Eastern Europe. BAE Systems (BA.), Leonardo among defence names catching a bid on it. Reaction from G7/Nato/US suggests this is a storm in a tea caup – misfires happen in warfare and don’t tend to lead to meaningful escalation. It’s not the Lusitania.
Macro forces play out in results
The effects of the UK’s unique economic situation are seen today in results from Premier Foods (PFD), which is benefiting from consumers trading down to own brand supermarket products and generally eating out less, meanwhile energy company SSE (SSE) enjoyed a fourfold increase in adjusted profits off the back of soaring energy prices although management preferred to focus on the headline, or reported, figure of a loss of £511m due to write downs based on fair value readjustments for future commodity costs. The company devoted time in its announcement to trumpet its investment of £1.7bn during the six months to September and said it could invest up to £24bn in the UK by the end of the decade given ‘a supportive government policy environment’ – a shot across the chancellor’s bows ahead of a mooted increase in windfall taxes on the sector to be announced tomorrow. GD
Deliveroo pulls out of Australia
Deliveroo (ROO) shares fell by 3 per cent after the online food delivery platform said it had ended its Australian operations due to its small market share and a challenging outlook. In the first half of this year, Australia contributed 3 per cent of the company’s gross transaction value and dragged down the adjusted cash profit margin by 30 basis points.
The company said that “it cannot reach a sustainable and profitable scale in Australia without considerable financial investment, and the expected return on such investment is not commensurate with Deliveroo’s risk/reward thresholds”. CA
Price hikes boost Hill & Smith’s margins
Hill & Smith (HILS) said its full-year operating profit would be “at the top end” of analyst’s estimates, which currently range from £84.9mn-£87.9mn.
The company said revenue from continuing operations increased by 19 per cent in the four months since its half-year results, with around two-thirds of this generated through price increases. Operating margins have improved as the year progressed and its reported numbers will also benefit from a foreign exchange tailwind, given its US presence.
A “material improvement” on cash generation is also expected when compared with its first half, when it recorded a working capital outflow of £41.5mn on higher raw material costs.
The company’s shares rose by 7 per cent but are down 35 per cent since the start of the year. Broker Shore Capital increased its underlying cash profit forecast for the year to £93.1mn, which is 6 per cent higher than the previous consensus forecast. MF
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